Many Singaporeans would think of buying an endowment plan at some point in their lives while others could be cold called by insurance agents or a bank relationship manager. It is always important to start saving early, but it is even more critical to get the right endowment (savings) plan. Here are the eight things to consider when you buy an endowment plan.
Following the 8 points below carefully and you would be able to select a reasonably good endowment plan.
- Have a budget in mind. An endowment plan is a long-term commitment, do not over-commit to a regular savings amount. For example, you are comfortable with saving $300/mth. However, the insurance agent determines that you can afford to save $1,000/mth after the “cash flow” analysis and hence recommends (up-sell) you a $1,000/mth endowment plan. Remember: there will be future financial priorities such as the medical cost for an immediate family member or wedding preparation that may not be currently present.
- Decide on the duration (number of years) of the endowment plan. We do not recommend the saving term + current age to exceed age 45 or age 50 (latest) due to employment uncertainty closer to the retirement age. For example, if you are currently 30 years old, we will not recommend you to commit to a 25 years endowment plan.
- Find a financial advisor that has been in the industry for more than three years. Why three years? Based on our experience, most agents that have less than three years of experience have a higher chance of quitting.
- Talk to a financial advisor who can get quotations from more than five insurance companies. Most Singaporeans have limited resources (be it the time or money), and it is crucial that we get to compare different endowment plans from various insurers to find an endowment that is most suitable to us before committing.
- Ensure that the guaranteed payout is higher than the total premium paid. This may sound common-sense enough, but we have seen many clients who purchased endowment plans recommended by their insurance agent or relationship manager that have a guaranteed value lesser than the total premium paid.
- Do not have too many riders attached to the endowment plan. A simple waiver of premium upon dread disease (aka critical illness) is fine but not the dread disease accelerator or early dread disease rider. We have seen several cases where the interest generated by the endowment is not even enough to pay for the total cost of the riders!
- Find out what is the actual rate of return based on the 4.75% projection. Most of the endowment savings plan are presented based on the projection at 4.75% p.a. But 4.75% p.a. is not what you are going to receive. For example, you will be surprised to find the actual return could be as “high” as 1% from some insurers.
- This is probably the most important point in this article. Always ask for the historical performance of the insurance company’s participating fund (minimum last seven years) to have an indication if the insurer can fulfil the 4.75% projection. Most quotations show the historical performance for the past three years, but this hardly provides a meaningful insight. Do not listen to the sales talk of the agent, insist on seeing the actual participating fund reports with the insurance company’s logo. Examples of Prudential’s participating fund reports (annual bonus) that show the Prudential’s participating fund performance from 2008 to 2015 (8 years) can be found here. We have participating fund data of most insurers since 2005 from various sources 🙂
If you need help with the eight points above, fill up the form below and we will assign an advisor to assist you
Besides getting a suitable endowment plan, you may want to read our article on “8 Things to consider when you buy a retirement saving plan” before getting your retirement plan.